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January 7, 2011

Could We See Facebook IPO In 2011?

by Sam Savage

A US investigation of the massive investment into Facebook by Goldman Sachs could force the popular social-networking site to go public much earlier than it had hoped for, according to analysts closely following the issue.

Goldman Sachs's investment, reported at 450 million dollars, has exposed the thin line between private and public markets and highlights companies' reluctance to launch an initial public offering (IPO) of shares that results in oversight by regulators.

"Companies are doing everything they can do to avoid going public. Facebook is a prime example," James Angel, of the McDonough School of Business at Georgetown University, told AFP.

"We've made it much more difficult in the United States to be a public company. We've made it much more expensive, the legal risks and the trading environment have also changed," he said.

Media reports earlier this week said Goldman invested 450 million dollars, along with Russian investment firm Digital Sky Technologies (DST) which sank 50 million dollars of its own money into the social-networking site.

The half-billion-dollar deal values Facebook at a staggering $50 billion, more than long-lived companies such as Boeing, Time Warner and Yahoo!.

The Financial Times reported the prominent Wall Street investment bank would close its 1.5-billion-dollar offering of privately traded shares in Facebook on Thursday after receiving billions of dollars in orders from its wealthiest investors.

The Goldman deal allows Facebook to tap capital markets, while avoiding some of the constraints of trading publicly.

"The big incentive to be a public company is that it is easier to have a trading market for your shares, but if there is a shadow market that provides as much liquidity as the public trading market than companies will not be interested in going public," Adam Pritchard of the University of Michigan Law School told AFP's Ron Bousso.

But the investment has raised questions about the fairness of such deals.

"Some people might (ask) 'why should only Goldman's favored friends get the chance to invest in Facebook?," said Angel.

The investment could also create a shadow exchange market beyond the scrutiny of regulators, exposing investors to potential risks due to the lack of transparency rules.

"Facebook may not necessarily want to disclose a certain amount of what they are doing. Part of the price of being public is the need to disclose finances and aspects of business and they might not want to disclose all their trade secrets," said Angel.

The deal has generated a swift response from the US Securities and Exchange Commission, which has begun looking through disclosure rules for private firms, according to media reports.

"One potential consequence of the SEC investigation would be the SEC filing an enforcement action compelling Facebook to register as a public company," Pritchard told AFP. "If that were a possible consequence, Facebook would rather do an IPO than be forced to go public."

Goldman customers looking to buy shares in the privately held Facebook will invest money in a new entity called FBDC Investors LP, according to a source familiar with the deal. Corporate records show that FBDC Investors was incorporated in Delaware on January 5, 2011.

Goldman customers have until Friday to commit to investing in the new entity and until next Tuesday to wire the money to the firm.

Along with $450 million of its own capital, the Wall Street Banking firm is raising at least 1.5 billion dollars from its wealthy customers through the limited-time offering.

Investors are becoming more and more enthusiastic to buy shares of Facebook and other fast-growing social networking companies on private exchanges.

"It depends on your view of the world," Ken Sawyer, the managing director of venture capital firm Saints Capital, which owns shares of Facebook, told Reuters. "If you believe that the ability to leverage this social network fabric will change the way companies acquire customers, then the valuation looks cheap."

"It feels a little irrationally exuberant with some of these transactions, some of these values, particularly given the level of disclosure," said Robert Ackerman, the founder of early-stage venture capital firm Allegis Capital.

"Maybe with Facebook that's well placed," he said, "but what about all the other companies that are going to ride on Facebook's coat-tails."

The laws of gravity are also different in the private markets in which the new generation of Web superstars trade.

Because there's no way to short shares of private companies, the shares are subject to upward pressure but not downward pressure, noted BGC Financial analyst Colin Gillis. "There's no counterbalance," he said.